IATA Maintenance Cost Conference © SGI Aviation 2015
IATA Maintenance Cost ConferenceThe financial impact of extending or reducing a lease
24 September 2015
Miami, Florida
1IATA Maintenance Cost Conference © SGI Aviation 2015
Index
Introduction SGI Aviation
Leasing landscape
Maintenance reserves
Effects on maintenance cost
- Extending or reducing the lease term
- Engine maintenance cost
- Other cost
Conclusions
Questions
2IATA Maintenance Cost Conference © SGI Aviation 2015
SGI Aviation
Who are we?
4 SGI has offices located in Amsterdam, Singapore, Guernsey and New York.
45+ Over 45 experts, located on almost all continents
15 Local experts in 15 countries who speak the language & know the culture
100+ More than 100 inspections performed, including 40 aircraft redeliveries in 2014
150Over 150 engines inspections, including management of 20 shop visits
7,500 More than 7,500 inspection days performed in 2014
SGI SingaporeAircraft & Engine technical servicesBusiness jets
SGI AmsterdamAsset managementAircraft & Engine technical servicesBusiness jetsConsultingRegulatory services
SGI AmericasTechnical servicesEngine services
63% Lessors& financiers
37% Airlines
150+Technical servicesEngine managementAsset managementConsulting services
25+ aircraft under management
Services
4050
3241Annual
Pre purchaseValuation
Redeliveries
Client base
Management 2014 Engagements
3IATA Maintenance Cost Conference © SGI Aviation 2015
Index
Introduction SGI Aviation
Leasing landscape
Maintenance reserves
Effects on maintenance cost
- Extending or reducing the lease term
- Engine maintenance cost
- Other cost
Conclusions
Questions
4IATA Maintenance Cost Conference © SGI Aviation 2015
Source: Ascend database
Initial lease terms have varied
greatly over the years
Overall the term has increased
slightly in the last two decades
Airlines are more risk averse,
usually opting for a shorter lease
term
Lessors prefer a longer lease
term, lowering remarketing and
associated movement cost
The average duration for the first
lease for the world fleet is
roughly 6 years
Initial lease term
The lease term has increased slowly, on average, over the last two decades
0
1
2
3
4
5
6
7
8
9
1999 2000
5,6
6,46,1
5,7
+3%
4,8
6,2
5,55,7
6,2
2013
5,6
2014
4,7
Duration
(years)
5,4
9,0
7,3
2001 2002
5,75,9
1995
4,8
2011 20122003 200920052004 2007 20082006 2010
7,3
5,7
6,8
19981996 1997
average lease term
Initial lease term – world fleet
5IATA Maintenance Cost Conference © SGI Aviation 2015
Source: Ascend database
Note: Situation as of 01 September 2015
Different lease terms
Wide body aircraft typically have longer lease terms
Emirates Airline 10.1 years
Ryanair 7.0 years
easyJet 8.1 years
Air China 12.0 years
American Airlines 11.9 years
AirAsia 5.3 years
2010-2015 Leased aircraft
Aircraft typeAverage of lease
period (year)Leased amount Year of first delivery
A380 11.8 11 2007
787 11.2 17 2011
777 9.9 44 1995
A330 8.4 110 1994
747 4.2 16 1970
A340 3.8 8 1993
767 3.5 50 1982
737 (NG) 9.0 395 1997
A321 9.3 109 1994
A320 7.6 411 1988
A318 6.6 30 2003
A319 5.7 103 1996
757 3.9 20 1982
Singapore Airlines 8.7 years
6IATA Maintenance Cost Conference © SGI Aviation 2015
Te
ch b
ub
ble
, 9
/11
Eco
no
mic
crisis
Source: SGI Aviation internal database, Ascend database, World Bank
During times of aircraft
shortages, lease terms and
lease rates will increase
This is further influence global
GDP growth
Airlines may not always be in a
position to negotiate the lease
term that best fits their operation
The large fluctuations in lease
rates may also result in airlines
having pay an additional
premium when extending the
lease term
Average lease rates
Lease rates largely depend on supply and demand and also follow macro economic developments
Airbus A320-200
CPI
Boeing 737-800
Hu
rric
ane
Ka
trin
a
Fue
l p
rice s
pik
e
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
0.48
11%
1%
8%
3%
2%
0.36
0.00
10%
9%
0.34
12%
7%
6%
4%
5%
0.42
0.30
0.22
0.26
0.24
0.28
0.32
0
0.38
0.40
0.44
0.46
CP
I
Lease r
ate
($m
il)
Ryanair order
Announcement of
A320 NEO
Monthly lease rates
7IATA Maintenance Cost Conference © SGI Aviation 2015
Negotiation the initial lease term and any possible extensions
requires airlines to look at all influencing factors
Determining the effect of each influencing factor requires
extensive knowledge and expertise, which airlines sometime
lack
Some elements can be determined relatively easily, whilst
others are much more subjective
The complexity of the lease agreement, associated
maintenance reserve mechanisms and redelivery conditions
make it difficult to determine the influence of major
maintenance items
The lease duration is typically centred around the major
maintenance events
Lease term
Airlines typically use a sophisticated decision making model to determine their requirements
AIRCRAFT LEASE
Lease rates
Aircraft
Availability
Commercial
requirements
(new routes)Aircraft life
cycle
(upcoming
maintenance)
Upgrades/
Modifications
Operating
cost
(fuel)
8IATA Maintenance Cost Conference © SGI Aviation 2015
Index
Introduction SGI Aviation
Leasing landscape
Maintenance reserves
Effects on maintenance cost
- Extending or reducing the lease term
- Engine maintenance cost
- Other cost
Conclusions
Questions
9IATA Maintenance Cost Conference © SGI Aviation 2015
Maintenance reserves are a pro-rata distribution of cost over the maintenance interval, usable for the various operators of the aircraft
Maintenance reserves are paid on a monthly basis and reduce the lessor’s exposure to unfunded maintenance events in case of an airline
bankruptcy
Maintenance reserves accumulate over time and are reimbursed to the airline once the maintenance event has taken place
- Reimbursement is limited to total accumulated maintenance reserves
- Shortfalls are funded by the airline
- Surplus is typically not returned to the airline
Maintenance reserves cover all major maintenance events; airframe heavy check, LDG overhaul, APU overhaul and LLP replacements and
engine performance restoration
Maintenance reserves
What are maintenance reserves?
Second operatorFirst operator Third operator
6 years check
Accu
mu
late
d
Ma
inte
na
nce
Rese
rve
10IATA Maintenance Cost Conference © SGI Aviation 2015
Main elements
How is it calculated?
Maintenance Reserve Calculation Challenge
Airframe heavy check 𝑀𝑅 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 =𝐼𝑛𝑠𝑝𝑒𝑐𝑡𝑖𝑜𝑛 𝑐𝑜𝑠𝑡
𝐹𝑖𝑥𝑒𝑑 𝑚𝑜𝑛𝑡ℎ 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙
Uncertainty over the heavy check cost. Cost can be difficult
to predict if the equipment is mature, in aging aircraft
programs or when checks are customized
Landing gear 𝑀𝑅 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 =𝑂𝑣𝑒𝑟ℎ𝑎𝑢𝑙 𝑐𝑜𝑠𝑡
𝑂𝑣𝑒𝑟ℎ𝑎𝑢𝑙 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙
Overhaul interval is typically calendar based or cycle based.
Prediction is relatively accurate
Engine performance restoration 𝑀𝑅 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 =𝑃𝑅 𝑐𝑜𝑠𝑡
𝑀𝑒𝑎𝑛 𝑡𝑖𝑚𝑒 𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑟𝑒𝑚𝑜𝑣𝑎𝑙
Performance restoration cost and mean time between
removal is heavily dependent on the type of operation,
operating environment and engine maturity
LLP replacement 𝑀𝑅 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 =𝐶𝑎𝑡𝑎𝑙𝑜𝑔𝑢𝑒 𝑝𝑟𝑖𝑐𝑒
𝐶𝑦𝑐𝑙𝑒 𝑙𝑖𝑚𝑖𝑡Predictable, little to no uncertainty
APU overhaul 𝑀𝑅 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 =𝑃𝑅 𝑐𝑜𝑠𝑡
𝑀𝑒𝑎𝑛 𝑡𝑖𝑚𝑒 𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑟𝑒𝑚𝑜𝑣𝑎𝑙
Overhaul cost and mean time between removal is dependent
on type of operation and operating environment
11IATA Maintenance Cost Conference © SGI Aviation 2015
A320
Source: SGI Aviation internal database
Maintenance reserves
How does this mechanism effect the airline?
737
Maintenanc
e ReserveEvent Cost Interval Full life Typical rate
6Y Check $930,000 72 Mth $930,000 $12,917
12Y Check $730,000 144 Mth $730,000 $5,069
Nose Gear $145,000 120 Mth $145,000 $1,208
LH Gear $165,000 120 Mth $165,000 $1,375
RH Gear $165,000 120 Mth $165,000 $1,375
APU overhaul $260,000 5000 APU HR $260,000 $52
Engine
overhaul $2,900,000 25000 FH $5,800,000 $232
Engine LLPs $2,981,014 Variable $5,962,028 Variable
Total
maintenance
value
$14,157,028
Maintenance
ReserveEvent Cost Interval Full life Typical rate
8Y Check $550,000 96 Mth $550,000 $5,729
10Y Check $400,000 120 Mth $400,000 $3,333
12Y Check $600,000 144 Mth $600,000 $4,167
Nose Gear $103,000 120 Mth $103,000 $858
LH Gear $103,000 120 Mth $103,000 $858
RH Gear $103,000 120 Mth $103,000 $858
APU overhaul $257,000 5000 APU HR $257,000 $51
Engine
overhaul $2,700,000 27000 FH $5,400,000 $200
Engine LLPs $2,901,860 Variable $5,803,720 Variable
Total
maintenance
value
$13,319,720
12IATA Maintenance Cost Conference © SGI Aviation 2015
Index
Introduction SGI Aviation
Leasing landscape
Maintenance reserves
Effects on maintenance cost
- Extending or reducing the lease term
- Engine maintenance cost
- Other cost
Conclusions
Questions
13IATA Maintenance Cost Conference © SGI Aviation 2015
Typical redelivery condition (Narrow Body)
AIRFRAME
Clear of all tasks not less than 24 months,
6,000 Flight Hours and 4,500 Cycles.
ENGINES & LLPs
A minimum of 24 months, 6,000 flight hours and 4,500
cycle until the next Engine Performance Restoration
At least 3,000 Flight Cycles remaining
APU
No more than 2,000 APU Hours
since last overhaul or heavy repair
OTHERS
Strict requirements on documentation
and certification
LANDING GEAR
No less than 24 months or
2,000 FC remaining
14IATA Maintenance Cost Conference © SGI Aviation 2015
Source: SGI Aviation internal database, industry data
Note: All figures are indicative
Maintenance life cycle
With an average lease term of 7.6 years, airlines are typically forced to perform an expensive engine shop visit
C check
LDG
Engine RP
12Y check
6Y check
Engine LLPs
APU
Criteria:
CFM56-5B equipped
Assume the aircraft is operating 5
flight cycles per day
Non escalated maintenance
program (MPD)
North American or European climate
(non-harsh climate)
Average lease
term (7.6) Mandatory clearance
period as per lease
agreement6.000
3.000
4.500
1.500
0
Engine
Performance
Restoration
C-Check
LDG
Engine
Performance
Restoration
12Y Check
APU
11 1210
C-Check
76 8
6Y Check
5 94
C-Check
13
APUAPU
1 3
US$ (x1000)
14 152
C-Check
15IATA Maintenance Cost Conference © SGI Aviation 2015
Source: SGI Aviation internal database, industry data
Note: All figures are indicative
Lease-extend scenario
Extending 2-year lease term adds on APU, LDG and 12Y check cost
2 more years’ operational time
Add-on cost
- APU overhaul
- LDG overhaul
- 12Y-check
Average lease
term (7.6) 9.6
12Y check
APU
C check
Engine RP
LDG
Engine LLPs
6Y check
Mandatory clearance
period as per lease
agreement
1.500
4.500
0
6.000
3.000
Engine
Performance
Restoration
13117
Engine
Performance
Restoration
C-Check
54 98
12Y Check
C-Check
LDG
APU
6
6Y Check
APUC-Check
321
C-Check
1514
US$ (x1000)
APU
1210
16IATA Maintenance Cost Conference © SGI Aviation 2015
Source: SGI Aviation internal database, industry data
Note: All figures are indicative
Maintenance life cycle
With an average lease term of 9.9 years, airlines are typically required to perform an expensive engine shop visit
Engine LLPs
Engine RP
APU
LDG
8Y check
C check Criteria:
GE90-115B equipped
Assume the 777 is operating 1.7
flight cycles per day
Non escalated maintenance
program (MPD)
North American or European climate
(non-harsh climate)
4.500
0
7.500
1.500
6.000
9.000
3.000
3
C-Check
2
C-Check
1 15
C-Check
14
APUC-Check
1312
US$ (x1000)
Engine
Performance
Restoration
9
C-Check
87
APU
6
C-Check
5
Engine
Performance
Restoration
C-Check
4
APU
10
8Y Check
C-Check
APU
11
C-CheckLDG
Average lease
term (9.9)
Mandatory clearance
period as per lease
agreement
17IATA Maintenance Cost Conference © SGI Aviation 2015
Source: SGI Aviation internal database, industry data
Note: All figures are indicative
Maintenance life cycle
With an average lease term of 9.9 years, airlines are typically forced to perform an expensive engine shop visit
LDG
Engine RP
APU
8Y check
C check
Engine LLPs
2 year reduction in lease term
Possible additional cost for cabin
refurbishment
Reduced cost:
- LDG overhaul
- APU overhaul
- C-check
Average lease
term (9.9)
Mandatory clearance
period as per lease
agreement
7.9
6.000
1.500
7.500
4.500
0
3.000
9.000
US$ (x1000)
8
C-Check
12
8Y Check
6
C-CheckC-Check
115 7
C-Check C-Check
Engine
Performance
Restoration
9
APU
Engine
Performance
Restoration
LDGC-Check
APU
4 15141310
C-CheckC-Check
APU
2 31
C-Check
APU
18IATA Maintenance Cost Conference © SGI Aviation 2015
Index
Introduction SGI Aviation
Leasing landscape
Maintenance reserves
Effects on maintenance cost
- Extending or reducing the lease term
- Engine maintenance cost
- Other cost
Conclusions
Questions
19IATA Maintenance Cost Conference © SGI Aviation 2015
Assume the engine is operating 5FC per day
Engine shop visit and LLP replacement
Engine maintenance cost is the largest contributer to the overall maintenance cost
16y0 8y
12,000-18,000 FC
2nd SV
8,800 – 12,900 FC
2nd SV
737NG with CFM56-7B
A320 with CFM56-5B
13,500 – 18,800 FC
1st SV
15,000 – 20,000 FC
1st SV
A320 5B SV cost: $2.9 million (excl. LLP)
Average period 1st run: 8.9 year
Average period 2nd run: 5.9 year
LLP
Life Cycles Cost
20,000 $1,502,580
25,000 $817,700
30,000 $661,400
LLP
Life Cycles Cost
20,000 $1,768,660
25,000 $811,500
30,000 $321,700
B737NG 7B SV cost: $2.7 million (excl. LLP)
Average period 1st run: 9.6 year
Average period 2nd run: 8.2 year
20IATA Maintenance Cost Conference © SGI Aviation 2015
Index
Introduction SGI Aviation
Leasing landscape
Maintenance reserves
Effects on maintenance cost
- Extending or reducing the lease term
- Engine maintenance cost
- Other cost
Conclusions
Questions
21IATA Maintenance Cost Conference © SGI Aviation 2015
31 Business-class seats
267 Economy-class seats
A full reconfiguration can be anything
from US$100,000 to several millions
Cabin reconfiguration
Aircraft cabin reconfigurations are costly and time consuming
Engineering $370,000
· LOPA change $80,000
· Monument change (each) $30,000
· CAM development $20,000
· IFE database upgrade $100,000
· Seats certification $20,000
Interior parts $3,481,000
· Full height monument restoration $280,000
· Class divider kits (per pair) $50,000
· PSU (each) $8,000
· PSU spacer panels (each) $400
· Standard sidewall panels (each) $5,000
· Seat to seat cables (each) $600
· Placards set $4,000
· Miscellaneous $15,000
Seats $3,876,500
· Economy seats (each) $5,500
· Business seats (each) $20,000
· In-seat video (each) $6,000
22IATA Maintenance Cost Conference © SGI Aviation 2015
* Cost per narrow body aircraft.
Authorities continuously introduce
new operational requirements and
safety programs
These may not be known at the start
of the lease
Lease agreements typically cover
cost sharing for Airworthiness
Directives
Operational requirements may not
always be mandated by an AD
Other operational requirements
There are many other cost drivers which should be taken into consideration
2015 2016 2017
$80,000
TCAS 7.1EASA
2018 2019
$240,000
FTIS
100%fleetFAA
$150,000
SATCOMCAAC
$80,000
TCAS 7.1EASA
2020
$400,000
FANS B+EASA
2021
$100,000
ADS-B OutFAA
$100,000
ADS-B OutEASA
23IATA Maintenance Cost Conference © SGI Aviation 2015
Index
Introduction SGI Aviation
Leasing landscape
Maintenance reserves
Effects on maintenance cost
- Extending or reducing the lease term
- Engine maintenance cost
- Other cost
Conclusions
Questions
24IATA Maintenance Cost Conference © SGI Aviation 2015
Index
Introduction SGI Aviation
Leasing landscape
Maintenance reserves
Effects on maintenance cost
- Extending or reducing the lease term
- Engine maintenance cost
- Other cost
Conclusions
Questions
25IATA Maintenance Cost Conference © SGI Aviation 2015
Questions?
Remko Bruinsma
T +31 20 880 4243 F +31 20 890 8490 M +31 6 1585 69 39
Email: [email protected] │Web: http://www.sgiaviation.com